Blue Dog Pork and the Tall Tale of Capital Constrained Banks

The Wall Street Journal reported on efforts by Arkansas Senator Blanche Lincoln to secure a provision in the financial reform bill that will aid an Arkansas bank owned by the Walton family (yes, the Wal-Mart gang). The provision would exempt banks with assets of less than $15 billion from meeting a more stringent capital requirement, replacing the $10 billion cutoff in the bills approved by the House and Senate.

The article cites Lincoln's rationale for this change. She claimed that the tighter capital rules "...would hinder their [banks] ability to generate lending for consumers and businesses at a time when access to credit is already difficult to come by."

In fact, there is little evidence that capital constraints on banks are affecting the ability of consumers or businesses to raise capital at present, as Lincoln implied. There are many banks that did not over-leverage themselves during the run-up of the housing bubble. These banks now have plenty capital to lend. However, there is no evidence that they are taking advantage of the weakness of their competitors by stepping up lending. This implies that capital constraints are not a major factor in the current downturn.

This is worth noting since the media have often been willing to accept, at face value, the rationales given by Blue Dog Democrats such as Lincoln for actions that seem like old-fashioned pork-barrel politics. As another example, last week the Washington Post reported on Indiana Senator Evan Bayh's efforts to save the fund manager's tax subsidy. It asserted that he was motivated by a concern about helping growing businesses, as opposed to the more obvious explanation - that he simply wanted to help wealthy people who supported his political ambitions.

While this WSJ article explores the obvious political motivation for Lincoln's actions, it does not note that her rationale makes no sense. The media should subject the pork pushed for wealthy supporters by Blue Dog Democrats to every bit as much scrutiny as they do the measures promoted for the benefit of other constituencies.